Despite a downward trend in interest rates, government-issued development bonds in Nepal are drawing increasing interest from investors. This shift is largely attributed to the sluggish performance in the real sector and a lack of more profitable investment opportunities. Investors, particularly banks and financial institutions (BFIs), are turning to these long-term bonds as a safer and more stable alternative in a risk-averse market climate.
In recent weeks, although the yield on development bonds has dropped—currently at 3.07 percent annually, down from 4.73 percent last year—the bonds remain in high demand. According to the Public Debt Management Office (PDMO), the government floated development bonds worth Rs 20 billion last week, but applications worth Rs 137.06 billion were submitted, nearly seven times the target. This overwhelming response reflects investors’ growing preference for secure government-backed instruments over uncertain private ventures.
One key reason behind this surge is the high liquidity parked with Nepal Rastra Bank (NRB). BFIs have deposited over Rs 591 billion in excess funds with the central bank, a result of slowed lending in the private sector. This surplus liquidity, combined with NRB’s efforts to lower policy and bank rates, has driven down returns on short-term treasury bills to as low as 2.5 percent, making development bonds more attractive despite reduced yields.
The government has planned a robust internal borrowing strategy for the current fiscal year. It aims to raise Rs 113 billion in domestic debt by mid-October, and Rs 362 billion overall through internal borrowing as part of its Rs 595 billion public debt target. The bond issuance calendar shows that four development bonds worth Rs 40 billion are scheduled between mid-July and mid-August, with eleven issuances planned for the first quarter alone. These bonds will have maturities ranging from three to eleven years.
Economists argue that the declining internal debt interest rate may offer temporary relief for the government, especially at a time when external borrowing is becoming costlier. The rising value of the US dollar—recently surpassing Rs 140.18—and the World Bank’s decision to double its interest rate to 1.5 percent on new loans are adding to Nepal’s financial burdens. In this context, relatively cheaper domestic borrowing through bonds is viewed as a strategic move to manage debt while sustaining economic stability.
